Brazil's electric power sector faces multiple challenges as the country emerges from its worst-ever recession. Severe drought has forced the hydropower-dependent country to ramp up electricity imports from neighboring Argentina and Uruguay, and to increase thermal power dispatch at home, causing electricity rates to spike for both captive and free market consumers. Facing critically low reservoir levels, Brazil's hydro generators must increasingly fulfill their supply commitments through expensive spot market purchases, placing a heavy financial burden on the system.
Meanwhile, corruption and political turmoil remain endemic, fostering uncertainty. While legislators aligned with embattled President Michel Temer voted to block criminal proceedings against him for obstruction of justice and conspiracy, Temer nonetheless faces 3% approval ratings ahead of the 2018 general election, creating concerns that his pro-business reform agenda could be erased under the next government.
These difficulties notwithstanding, Latin America's largest economy is stabilizing, with a series of pending privatizations, tenders, and M&A opportunities in the power sector stoking investor interest. After contracting by 3.8% in 2015 and 3.6% in 2016, the IMF expects Brazil's economy to grow by 0.7% this year. The government has said it plans to complete by mid-2018 the privatization of state-owned energy holding Eletrobras, an initiative that the treasury estimates will replenish government coffers to the tune of 7.7billion reais, helping to reduce Brazil's fiscal deficit. The mining and energy ministry (MME) also published this year a proposed framework for market-based reforms in the sector, with a provisional measure from Temer expected soon that will trigger their implementation. Wind energy has grown steadily despite the recession, while Brazil's once-fledgling PV solar segment is finally gaining traction and poised to supply a measurable share of the generation mix over the coming years.
The trends toward privatization and economic recovery bode well for the sector. But the questions of when, how, and to what degree the reforms and privatizations will take place remain largely unanswered, with the upcoming election compounding the uncertainty. This report examines the market's expectations, questions, and concerns about Brazil's electric power industry heading into 2018, in order to assess the challenges and opportunities therein.